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Mike Rosewn Column November 02, 2008

Obama plan is road to financial ruin

The centerpiece of Barack Obama’s economic plan is his grandstanding claim that “95 percent of Americans will get a tax cut.” As a shrewd campaign slogan, it’s simple, seductive and fits on a bumper sticker. It’s also a lie, and rank demagogy.

To see through this con game, it helps to understand the nuances of fiscal policy and Obama’s deceptive wording.

For openers, in order to get a tax cut, one must first be a taxpayer. About 40 percent of Americans are excused from
paying federal income taxes because their net income — after deductions, exemptions and credits — falls under the tax threshold. How in the world, then, can they get a tax cut? Obamanomics does this in two ways:

• Normally, a tax credit is an offset to a tax liability. Under the Obama plan, those with no income tax liability will get a check from the government for a variety of new Obama subsidies and social programs. These are called “refundable” tax credits, a euphemism for a government handout. It’s like getting cash for a supermarket coupon when you haven’t bought the product.

• When asked how those who don’t pay income taxes can be said to get an income tax cut, Obama’s economic spinmeisters muddy the waters by lumping income taxes together with payroll taxes, and then they claim that everyone (except the top 5 percent) deserves a tax cut, including relief from payroll taxes. But payroll taxes and income taxes shouldn’t be lumped together.

Income taxes are imposed on your earnings from all sources, including employment, interest, dividends, capital gains, prizes, gambling winnings or a state lottery bonanza. The revenue government collects from these taxes can be spent on virtually anything.

Payroll taxes are more narrowly based, applying only to income from wages, salaries and tips. (Self-employment income is also subject to this tax.) If you’re employed, you pay a share of the tax and your employer pays a share.

But unlike income taxes, federal payroll taxes are dedicated to specific programs like Social Security, Medicare and unemployment insurance. Your contribution to these programs is what qualifies you to receive future benefits. The more you pay in Social Security taxes, the greater your benefits in retirement. Medicare is a heavily subsidized insurance plan; your contributions are the equivalent of insurance premiums. The less people pay in payroll taxes, the more these become welfare programs.

Obama’s brand of Robin Hood economics, using federal taxes to “share the wealth,” as he puts it, is nothing new. We’ve been doing this for almost 100 years through our progressive income tax. He just wants to make it more progressive.

But the top 1 percent of taxpayers already shoulders 40 percent of the total individual income tax burden (about twice their share of total income); the top 5 percent pays 60 percent; the top 50 percent pays 97 percent; and the bottom 50 percent accounts for only 3 percent of the total, almost nothing. Obama, “the progressive,” says this distribution unfairly favors “the rich,” so he wants to raise not only their income taxes even more, but their payroll taxes, too.

Obama’s political calculus is transparent. Afflict a small percentage of Americans with ever more confiscatory taxes while enriching a large percentage at their expense. Just two problems:

• Tax revenues from this won’t come close to funding his extravagant spending plans.

• Pandering to an increasing population of net tax receivers at the expense of a dwindling population of net taxpayers may be an easy way to buy votes, but it will ultimately destroy our republic.

Mike Rosen writes a weekly column for the Rocky Mountain News. His radio show airs weekdays from 9 a.m. to noon on 850 KOA.